27 Jan 2012

RBI In Spotlight As Momentum Picks Up

In a week shortened by the Independence Day holiday, India turned in a fourth successive week of gains, the Nifty adding 156 points to close 3.1% higher at 5205. In January alone, foreign buying has reached 60% of its volume for FY12 to-date.

The Reserve Bank of India’s quarterly monetary policy review got top-line billing this month. The central bank settled for a CRR cut of fifty basis points with effect from January 28th. This cuts the cash reserve ratio to 5.5% and releases $6.5bn of additional liquidity into the system. Open market operations will also continue to prevent the additional government borrowing due to fiscal lassitude crowding out private sector loan demand. Political pump-priming for the state elections through early March will keep the RBI in conflict with the government over growth stimulus. A prudent Union Budget after the elections should allow policy rate cuts at the next RBI meeting in March.

Meanwhile, the RBI’S stated intentions are: to ease liquidity, to mitigate downside risks to GDP and to anchor medium term inflation expectations. The government is to switch to monthly reporting of food and fuel inflation numbers in a further attempt to assure the quality of the information.

Momentum is picking up, however, largely driven by a resurgence of foreign interest. This has brought India from the bottom to the top of the global equity market league in the space of a month and valuations are still near historical lows. If the economic data stay within the RBI’s target ranges, this should continue.

25 Jan 2012

Monthly Outlook: Prospects For Long-Term Gains Excellent

As we move into a new year, a number of encouraging signals are emerging.

Important state elections have been set for February/early March and the Union Budget has been postponed until afterwards. The Congress party is setting great store on improving its representation in Uttar Pradesh and thus re-jigging its national coalition in a manner which might facilitate stalled economic reforms.

Meanwhile, even though FDI in multi-brand retail has been delayed, other less contentious FDI rules have been relaxed. Also, access to Indian stock markets by foreigners was eased considerably with effect from January 15th, although this move did nothing to ease the tax issues involved.

Then the economic data started to improve, with better IIP numbers for November and a sharp fall-off in inflation. This validates the RBI’s position on monetary policy and makes it a racing certainty that we will see aggressive easing during 2012. Monetary easing in India is always accompanied by stock market strength.

Fiscal consolidation, another priority, will be facilitated by two key reforms: introduction of the new Direct Tax Code (DTC) on April 1st and the implementation of a national Goods and Services Tax (GST) a year later, at most.

Against this background and despite the low point of the turn of the year, we believe the prospects for long-term gains are excellent.

20 Jan 2012

Upward Momentum Builds

This was the third successive week of upward momentum, with sentiment improving on the back of evidence of modest revival in US data and successful returns to the bond markets for Euro zone casualties France and Spain. Against this background, the Nifty advanced by 183 points to close 3.8% up at 5049.

A number of key events on the economy and reform agendas should further improve sentiment. Wholesale Price Inflation fell sharply as expected, from 9.1% down to 7.4%, validating the Reserve Bank of India’s (RBI) revised target for a fiscal year-end number of 7%. Food price rises have gone into reverse and even the fuel price impact from currency appreciation is moderating.

A shot in the arm for foreign investor confidence came from the Supreme Court when it overturned a lower court decision and the Income Tax Department, which claimed $2.6bn in capital gains tax from Vodafone in respect of its acquisition of Hutchison Telecom’s Indian operations. We have always promoted India’s common-law legal system and the independence of its judiciary because in our experience it works, slowly but surely.

Meanwhile, the government announced that it will launch a $35bn programme of public sector investment as a commitment to stopping the slowdown in GDP growth.

Moderating inflation, the probability of easier monetary policy before the end of FY12, the possibility of economic reform gathering momentum after state elections this quarter and one-offs like the Reliance Industries share buyback are just the tonic the market needs.

13 Jan 2012

FDI Picks Up

We had a second week of upward momentum in succession as the third quarter results season started; optimism prevailed in Europe at first as it did in US markets. At the close, the Nifty had added 2.4% to close 112 points up at 4866.

Infosys kicked off the Q3 reporting season for major companies by announcing sales figures which were 13.9% up year-on-year and currency movement helped to boost net income by 33%. Their guidance for Q4 was for flat results at best and that was a major shock for the market, which marked the shares down by more than 8% on the day and hit the entire sector hard.

Foreign direct investment (FDI) was strong again in November after two weaker months: $2.5bn of investment was higher by 56%. This week, the government approved 20 new FDI projects worth $400mil. The committee of secretaries has agreed to recommend a limit of 49% for FDI in airlines; the decision now moves to the Cabinet for approval. This is expected to draw foreign investment to the sector which has been ravaged by intense competition with Air India, the state-owned carrier.

This week we will see the effects of the introduction of relaxed access rules for foreign investors in Indian stock markets. There has been no change in tax provisions, however, so investors still need to take appropriate advice to minimize liability. Himalayan Fund has been providing liquid access to Indian stock markets for foreigner investors with no tax liability for more than twenty years.


6 Jan 2012

Rules For Foreign Investors Relaxed

This week the Nifty added 130 points close 2.8% up on the week at 4754 after trading in a range of 4.5%. The average daily trading volume was weak again, however: $1.9bn against a twelve-month average of $3bn.

The Royal Bank of India (RBI) has again relaxed the external commercial borrowing (ECB) norms for Indian companies to raise debt overseas by the automatic approval route, to $750 million. Clearly the central bank wants to boost volumes in order to bolster foreign reserves. The RBI also published its recommendations for adopting the Basel III standards to Indian banks; tougher in capital levels and implementation schedule.

The food inflation figures continue to validate the RBI’s stance that the overall Wholesale Price Index would decline rapidly from December through March, to its revised target level of 7%. The week of December 24th saw prices decline by 3.4% compared to a rise of over 20% a year earlier.

The Ministry of Finance and the Securities and Exchange Board of India announced that from January 15th, the rules for portfolio investment by foreigners in Indian stock markets will be relaxed. The new access rules do not change the tax regime that will apply and investors should get their own advice on liability to Indian tax on income and capital gains. Himalayan Fund investors enjoy tax-free returns thanks to the benefits available under the Netherlands/India double tax treaty, which are very favourable.


2 Jan 2012

Our New Year Wish-List

Well, we finally got to the end of 2011, badly bruised but still intact. It was not the worst year we’ve seen in equity markets but it certainly ranks among the most stressful. In India, the Nifty dropped 1511 points, to close 24.6% down at 4626. For foreign investors, a 16% depreciation in the Rupee brought a total loss of over 40% on the year. Market momentum was frequently driven by a narrow range of shares trading in light volumes, making portfolio management very difficult.

Market conditions in 2011 were dominated by global economic uncertainty, compounded by ridiculous behaviour by politicians globally but particularly in the United States, Europe and not least, India.

In this context, with all due humility, we wish for a better year in 2012, all the more so if our wish-list could be fulfilled.

1. May politicians acquire some sense. This may be the least likely to be fulfilled! In the US, they need to learn that overcoming the nation’s debt crisis needs a judicious mix of adjustments to taxes as well as expenditure. This is unlikely in an election year marked by extreme partisanship. In Europe, the Union concept seems incapable of raising the collective good above the sum of national interests. India may hold the best prospect by comparison: all it needs is to mobilize reform legislation in the next session of parliament and execute action in support of foreign direct investment. Too much to ask? Maybe, but no-one can afford a general election soon either for lack of organization or popular support.

2. May markets revert to their original purpose. Capital markets were intended to be the source of funding for productive enterprise, to produce products and services while generating employment and return on investment. The recent history of slicing and dicing existing paper to generate supposedly assured returns only served to inflate the market bubble, as does the more recent phenomenon of high-frequency trading. The volume of new issues of equity with a productive purpose has plunged. Economies need investment which in turn needs opportunity, plus an hospitable policy environment. Again this may favour India in 2012: monetary policy has reached its peak and easing is highly correlated with a strong stock market. Public sector investment is  improving and lower policy rates would revive private sector investment.

3. May governments be able to afford to hire smarter employees. A consistent theme since the crisis of 2008 has been that highly-paid executives in the private sector have run rings around civil servants. The hired help is so much better motivated and compensated that they can obstruct beneficial reform. Would it hurt for the bonus pool to be the offset for errors and rogue behaviour, rather than the P&L? When competition and peer pressure are dominant influences, this might restore some balance between the rewards for employees and owners. This might allow government to become more competitive in recruitment.

Maybe these are far-fetched, we can only hope. Happy New Year!